72(t) distribution

[Weemery]

I have a client who is going to roll over his 401(k) in about 2 months, and he wants to take a 72(t) distribution on a monthly basis. He is age 57, and he needs the income stream to fill the gap until he reaches age 62. My difficulty lies in deciding which distribution method and table to use to determine his SEPP payments. His goal is to get the highest possible monthly distribution. I can use the software to decide which method will allow the largest distribution, buy I'm honestly confused by the differences. I don't want to cause problems for him in the future. How do you decide???

Thanks,
Matt

[bss]

Hmmm...How about he take distributions (as much as he wants) from his 401k penalty free and not worry about the 72T. Is that an option?

[Lucullus]

Only if he separates from service with the employer.

[davidwoods]

Seems to me that if he is going to roll his 401(k), he's likely already left service.

[sscapmgmt]

I agree with bss. If it is an option, why not maintain the flexibility by taking what he wants, when he wants it, rather then locking into (I understand there is a revenue ruling which allows a participant to switch from one type of SEPP method to another without triggering the 10% penalty) one of the SEPP methods?

[JED]

I have never been able to wrap my head around the difference between the annuitization method and the amortization method, certainly couldn't explain the difference to the client. Be so much simpler if they'd say - this is the MOST you can take (whichever method gives the highest number), any dollar amount under that is OK.

[Michael E. Kitces]

Planner X, MBA, CMFC, CFP wrote:

> I agree with bss. If it is an option, why not maintain the
> flexibility by taking what he wants, when he wants it, rather
> then locking into (I understand there is a revenue ruling which
> allows a participant to switch from one type of SEPP method to
> another without triggering the 10% penalty) one of the SEPP
> methods?


PlannerX,
Revenue Ruling 2002-62 grants taxpayers a the opportunity to change from the annuitization or amortization method to the RMD method. But the change can only be done once, and only in that direction (from annuitization to RMD or from amortization to RMD).

The general idea/purpose of it was to allow a change when an account balance is being substantially depleted to the RMD that recalculates annually based on the reduced account balance and thus can reduce the size of the withdrawal to avoid catastrophic depletion.

Hope that helps!

Respectfully,
- Michael E. Kitces, MSFS, CFP(r), CLU, ChFC

[sscapmgmt]

Yep, I totally understand that and its rationale. Thanks! I only put that little parentheses "disclaimer" about being able to switch methods because I thought for sure someone would post something to the effect of, 'No, Planner X, they're not "locking into one of the SEPP methods" as you mentioned because there may be an opportunity to change from one SEPP method to another.'

Thanks again!

[momerrily]

Hey, Michael or whomever,

Can you tell me which table to use for the RMD calculation? I looked thru Pub 590 and didn't find an answer.
The regular RMD table starts at age 70 which doesn't help for a 50 year old who has been doing SEPPs. And Table 1 is listed for beneficiaries. Is there an expanded Table 3 somewhere?
Any guidance in where to find this answer would be much appreciated.

[sscapmgmt]

ML,

Do a search on Google or irs.gov for Revenue Ruling 2002-62. Once you find the Ruling, there will be an expanded Uniform Lifetime Table (I think this is the table you're looking for), which I believe starts at age 10.

[dan]

See page 3 of the below URL for the uniform table for all ages:

http://www.unclefed.com/Tax-Bulls/2002/rr02-62.pdf

[momerrily]

Planner X and DDB,

Thanks much.

[dshedrick]

You can cut to the chase & use the on-line freeware from CCH. Very good explanation & all the work is done for you.